GenuineVC David Beisel's Perspective on Digital Change

A Choir of Angel Investors Sing Different Parts

February 12, 2012

We at NextView Ventures often invest in a startup’s first round alongside other funds; either seed stage focused ones like ourselves or larger traditional firms. Just as often, however, we’re investing alongside individual angel investors who are participating in the round as well. Angel investors come in many shapes and sizes, however. And it’s not always easy to recognize the pros and cons of taking money from individual investors, or how to even seek them out in the first place. Addressing both of those issues can stem from the motivations as to why someone would want to put their hard-earned cash into a risky early-stage startup in the first place. Along those lines, the world of individual angel investors is easier for entrepreneurs to navigate when you can recognize the category which he falls into based on their incentives and actions. The choir of angel investors out there is comprised of a number of players which sing different parts:

The Super Angel. Much has been written about this category, so I won’t belabor the description beyond that the defining characteristic is the large number of investments that he makes. PROs of taking his angel money are the feeder system to venture financing of the next round and the vast network of portfolio CEOs which can be tapped into for connections and help. CONS of an investment from a Super Angel include potential lack of “value add” because his time is spread so thin amongst many portfolio companies.

The Domain Angel. Investors in this category are usually operating executives who have spent their entire careers in a specific industry vertical, like internet travel, for example. They will have the ability to “see” the opportunity that the startup is going after unlike anyone else, save the entrepreneur because they inherently get the space. PROS: Industry-insider who serves as a validator for the rest of the investment syndicate, extremely helpful advice and network connections. CONS: May be more proactive in “offering” advice that is uninvited.

The Previous-Colleague Angel. Having someone who the entrepreneur(ial team) has worked with before can be a good validator to other syndicate investors and future investors that they all work well together. PROS: Nice signal value. CONS: Potentially not much value-add beyond initial financing round.

The Friends & Family Angel. These are the proverbial first-commit investors. PROS: Known quantities who are usually the first people to be willing to write a check. CONS: No value-add subsequently, and can potentially needlessly interject into operations or future financings that are destructive for the company.

The Grouped Angels. Especially here on the East Coast, angel investors have formally grouped themselves together for various reasons. This can benefit entrepreneurs because of a one-pitch-many-investors process, but can be challenging too. Elaborating on both the pros and cons here are probably the topic of another post.

The Fellow-Entrepreneur Angel. Entrepreneurs know other entrepreneurial endeavors best, and can be great backers of other businesses – they’re likely to be one of the first to take the leap of faith and the first to help, which are just two of the PROS. CONS: depending on the size of their previous wins, they may not have a large checkbook; if the relationship is more of a peer than an advisor, they may not be constructively critical.

The “True Believer” Angel. These angels are can as difficult to find as a diamond in the rough, but there are those angels out there who hear startup’s story, instantly believe, and want to immediately invest sometimes in spite of the financial risks. PROS: Over-the-top encouragement and support, a cheerleader as a balancing voice amongst what-have-you-done-for-me-lately investor syndicates. CONS: Lack critical eye and challenge to push an entrepreneur after the investment has closed.

The Financial Angel. There is a small cadre of angels out there who are diligently and intentionally, but also quietly, building a diverse of early stage startup investments through the lens of a portfolio allocation model. Rather than investing in a fund manager to do the work for them, they are instead doing it themselves for the purposes of disbursing their personal capital into a portfolio purely aimed at financial return. PROS: Validation for other financially-savvy syndicate investors, lack of intrusion to let the entrepreneur run his own business. CONS: often very little help or involvement with the company post-investment, if at all.

The “Sport Fisherman” Angel. These mega-wealthy individuals, sometimes not from the startup world, invest an extremely small portion of their net wealth into early-stage startups so that they have something to talk about with their friends at cocktail parties. They do it merely for the entertainment-value of participating and care very little if their investments actually yield a return (though that would make for even better conversation fodder). PROS: Sometimes these individuals are well-connected or have a public persona which could be helpful to the business. CONS: Potential lack of concern for the entrepreneur or the company, as there is always another fish to try to catch.

The Foolish Angel. Often bucketed with others above into a “Friends, Family, & Fools” category, I think that the truly naïve blind supporter angel deserves his own category. PROS: Money is money. CONS: Many, as a foolish owner of your business can influence it in foolish ways.

If, as an entrepreneur, you’re currently seeking and pitching angel investors, and he doesn’t fit into one of the above categories, then there’s a good chance it’s going to be tough to get him over the line and commit to writing a check. All of the people in the above categories have their own different motivations, but they at least have those as drivers towards investing. Without a specific rationale, it’s an uphill battle to convince an angel investor part with his own personal capital.

Conversely, when starting a financing process which includes raising money from individual angels, using the above schema as a guide to thinking about who within your network (and your network’s network) might be interested in participating as an early investor is a good first step.

At the end of the day, all money is green. But if you have the fortunate ability to be oversubscribed in a seed round and are selecting who you are going to let into limited space within the round, it’s important to think about composing a syndicate of angel investors which come from a deliberate range of the above categories so that you can maximize the benefits and hopefully diffuse some of the potential drawbacks. Here at NextView, we welcome investing alongside individual angels, especially when they’re going to be constructive in some way. A vast majority of the seed rounds in our portfolio have angel participation; and as my partner Rob explained in a recent overview, a third of our initial investments are syndicates comprised of just the NextView Ventures fund plus individual angel investors.

David, This is great. One day someone needs to extend this analogy with the “Fallen Angels” those who never return calls, those keep pushing or rescheduling meetings, or say they will invest but never do. I had a bit of all of that in my round, and it costs me time, when a “no” would have been great. – BC

http://twitter.com/Josh_Goldstein Joshua Goldstein

David, great post – thank you. One question, do you consider the celebrity angels (e.g. Kutcher, Gaga, DeCaprio) to be “sport fisherman angels?” Or do they require a new category altogether?

http://www.yoursuspect.com Ben Saren

Great post David. When you’re an entrepreneur on your last dime and looking for your first round, anyone who offers you money seems like a savior, a hero who can get you to that next inflection point. Not taking the money because they might not add enough value seems foolish at the time, when that’s the very thing that you need (or think you need). And while not raising money seems like a nightmare, in the longer term raising money from the wrong angels can be the real nightmare.

About Me

I am a cofounder and Partner at NextView Ventures, a dedicated seed-stage venture capital firm making investments in internet-enabled startups. Read More »